Oil Insurance Limited (OIL), the Energy Industry Bermuda based mutual, who can provide a combined single of up to USD 400mm for Property Damage and Operators Extra Expense (OEE) is an extremely cost effective risk transfer mechanism for many energy insureds.
Unlike the Commercial Insurance market, OIL effectively offers it members insurance ‘at cost’.
OIL provides a broad form Property Damage / OEE cover, and effectively has no charge for drilling operations (a member’s premium is not impacted by their drilling programme) and no charge for construction risks (only asset values in the Insured’s latest report and accounts go into the rating formula).
OIL also provides full limit cover for resultant Offshore PD / OEE from a cyber event that the commercial market currently struggles to offer.
Many insureds find that even in a soft market the commercial market is unable to offer the breadth of coverage or premium levels OIL can.
However OIL really comes into its own in a hard market cycle where its premiums levels are unaffected by hardening of rates (which in past cycles have often been dramatic in the energy insurance sector) or withdrawal of capacity.
Could it be that the downstream energy Insurance sector is entering such a cycle now, making OIL an attractive proposition for downstream energy risks?
For further details on OIL, please request a copy of our Guide to OIL from your usual Account Executive (or refer to a more in depth article we included in our October 2017 Energy Insurance Newsletter, available on our website).
OIL however, are not totally immune to the increased loss activity the downstream energy sector has experienced in recent years (referenced elsewhere in this newsletter) seeing its losses in 2018 exceed the average of recent years, mainly from its Refining & Marketing sector.
The impact on premium in OIL however is smoothed over a 5 year period.
Marsh JLT Specialty OIL Budgeting Tool
Marsh JLT Specialty have developed an OIL budgeting tool that provides a fairly accurate estimate of an OIL member’s next year OIL premium based on a low, medium, and high current year loss outcome (based on factors applied to recent historical OIL loss years) shown alongside a premium using OIL’s latest annual loss expectation from its own model. We can adopt our OIL model to include any level of OIL ‘shock loss’ a client wishes to see the impact of.
We can also point out the maximum worse case Experience Modifier (or penalty premium) that a member is likely to face in addition, should they have losses themselves that puts their loss ratio to OIL over a certain threshold, which they may or may not wish to factor into their budgeting.
Whilst 2019 saw an increase in OIL premium due to a relatively good loss year falling out of the 5 year premium calculation that was replaced by a much larger than average/expected loss year, this would have been to a large degree captured by the high-end budget estimation of our budgeting tool.
What will happen in 2020 to OIL premiums? The last 5th of the 2014 loss year, that was an exceptionally low loss year for OIL will be replaced by 1/5th of 2019 losses, meaning if OIL’s 2019 loss record returns to their norm, OIL premiums will go up again.
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TALK TO AN EXPERT
If you would like to talk about any of the issues raised in this article, please contact John Cooper, Managing Director -Technical on +44 (0)203 394 0464.